Rise in Observation Status Could Be Costly for Patients and PTs

A recent article in the Wall Street Journal reports that hospitals, wary of regulatory penalties, are increasingly holding patients for observation rather than formal admission. The practice triggers outpatient therapy caps and requires physical therapists (PTs) to submit functional limitation reporting data to the Centers for Medicare and Medicaid Services (CMS) for physical therapy services provided while the patient is on “observation status.”

The WSJ article draws data from the Medicare Payment Advisory Commission, which released a report showing a 34% rise in observation services related to Medicare beneficiaries between 2004 and 2011. During the same period, inpatient admissions declined by 7.8%. According to the report, the overall rise in beneficiaries over that same time period—13%—does not account for the increase in observation status.

The use of observation status in hospitals can be problematic for PTs, whose services can be subject to therapy caps should a patient's hospital stay be classified as outpatient, according to an APTA advocacy letter (.pdf). Additionally, beginning this year, CMS requires that PTs must submit functional limitation data (G-codes) for observation patients in order to receive payment. PTs can also find themselves challenged to create discharge plans for patients whose observation status disqualifies them from the 3-night inpatient stay required to receive Medicare payments for skilled nursing facilities.